Q & A: What is Integrated Business Planning?
We sat down with an IBP expert and fired off a series of questions to help readers interested in IBP understand the following:
- Its definition
- Its true value
- How to go about finding the best IBP solution
Why the sudden interest?
Question: There is a lot of noise about Integrated Business Planning (IBP) in the market. What is driving this?
Answer: Today, more than ever, there is financial pressure to perform. This is driven by the increasing power of retailers and circumstances imposed by the recession. This has resulted in the need for companies to clearly understand the financial impact of their decisions; however, four inter-related factors make this difficult:
- Demand volatility has increased considerably for most companies.
- Supply complexity has increased. There are more options from which to choose. Subcontracting manufacturing and logistics operations is more common. Supply chains are broader in scope. Goods are distributed across worldwide supply chains.
- Input cost volatility is a constant that manufacturers can depend on – increasing challenges for profitability. No matter the commodity (e.g. aluminum, gas, or petrochemicals); all have experienced market fluctuations unlike times past.
- The connection between costs and volume is not linear. With a mix of fixed and variable costs, and some costs varying by volume and others by time, it has become more difficult to understand the financial implications of business decisions.
What does IBP mean?
Question: Thought leaders seem confused about the definition of Integrated Business Planning, can you define it?
Answer: In the simplest of terms, IBP reconciles and harmonizes strategy and execution by aligning strategic plans into operation plans and bringing the practical aspects of execution (constraints, capacity available, realistic throughput rates that have been achieved, detailed unit cost, and profitability) into the creation of strategic plans.
The outcome of IBP is a true business plan, rather than a demand plan, supply plan, production plan, or a financial budget. Through IBP, enterprises gain a single holistic plan that unifies the business, seamlessly connecting corporate performance management, financial planning processes, and operational planning systems. This holistic business plan increases business alignment through the sharing of performance strategies and helps quantify business risk so enterprises can rapidly adapt to meet challenges.
What's the overall impact of IBP?
Question: What is the typical impact of Integrated Business Planning? Can you give specific examples?
Answer: Since most companies have not made a conscious choice to integrate strategy and execution to create a holistic business plan, results can be dramatic when the process is started.
For example, Beaulieu Group, a global carpet manufacturer, found that they achieved a 6X return on their investment in a six month period, a result of focusing their efforts on what mattered most (e.g., proactively shifting product mix and sourcing as prices and input cost change) and eliminating resources and effort that created extensive drain on the organization.
With IBP, Beaulieu Group has changed operational assumptions, re-evaluated planning scenarios, assessed business impact, and rapidly updated their plan of record.
What should I consider when evaluating IBP solutions?
Question: What critical factors should a financial analyst consider when evaluating Integrated Business Planning solutions? A supply chain manager?
Answer: Critical questioning includes:
- Can execution characteristics, capabilities, and constraints be modeled correctly in order to gain an achievable strategic plan?
- Can the IBP solution co-create financial plans in sync with operational plans? Note: a financial plan refers to audit quality financial statements (e.g., Income statement, Balance Sheet, Cash Flow) which provide a full financial picture?
- Will this solution allow users to clearly understand variances – from a budget to a plan, or a baseline to a scenario, at operational and financial levels?)
- Can the solution evaluate alternative “what-if” scenarios in the formation of budgets, strategies, and operational plans? Can the scenarios consider financials as constraints? Can the scenarios optimize to multiple objective functions at the discretion of the user?
- Can we drill down and understand the root causes of those gaps?
- Does the solution have a concept of marginal contribution? This provides the specifics you need to understand the targeted actions you can take. If I sell more of this product, I will have this impact. Is it worth it? If I sell less of that product, I will have this impact. Are the risks worth taking?
What sort of technology requirements does IBP have?
Question: What is the underlying technology requirement for successful Integrated Business Planning?
- The key to any IBP solution is having an underlying holistic model that represents the business as it behaves in reality, including business, financial, and supply chain constraints. Additionally, it is important to know how variable and fixed costs are incurred, the structure of reporting hierarchies, and process flows with mass/energy balance.
- The integrated model should support advancedanalytics to enable users to identify and evaluate the best plans and decisions, including:
- Allowing users to simulate and optimize scenarios with multiple objective functions
- Supporting analyses from different angles (e.g., solving for optimal product mix rather than holding product mix constant, and solving for a supply plan) allowing users to communicate effectively as well as understand the impact on their KPIs
- Providing rich information, including detailed cost analyses, marginal profitability, financial statements, key bottlenecks/constraints, etc.
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